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Dubai rents begin upward march |
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Monday August 10 2009
Withholding of inventory by landlords has led to a marginal increase in
rents across Dubai, but average apartment rents have fallen by 29 per
cent since their peak in the fourth quarter of 2008, according to a new
report.
"We are already seeing a marginal increase in rents in
the third quarter. This is a recent trend that did not have an impact
on the second quarter data, rather it was spotted in July and August.
Depending on owner behaviour we may see this ease towards the end of
the third quarter," Jesse Downs, Director of Research & Advisory
Services, Landmark Advisory, told Emirates Business.
"Some
areas are experiencing marginal price increases that are based on
fundamentals. High-end apartments in Dubai Marina are a perfect
example," she said.
In a report titled Delaying the inevitable:
Owner Behaviour Preventing Rent Floor, Downs said assuming that
landlords are exiting the market due to lower rents, this behaviour
will prevent the leasing market from reaching a rent floor. In an
oversupplied market such as Dubai, rent floors are consumer driven. The
momentary respite in the rent correction process, caused by a supply
distortion, is only temporary and will reverse as soon as those
properties come back onto the market.
"Real rents will be determined by what Dubai residents are willing to pay," said the report.
According
to the Dubai Property Price Index, average sale prices for villas
declined 24 per cent, while apartment prices fell 17 per cent during
the second quarter of 2009. However, demand was considerably stronger
for villas, which accounted for 73 per cent of all residential sales in
the second quarter. Sale volumes in Jumeirah Village were particularly
strong, with an average transactional price of Dh577 per square foot,
which is an "excellent" value.
While bid-ask spreads ranged
between zero and 18 per cent, nearly three quarters of all sales
verified by Landmark had a zero per cent bid-ask spread in the second
quarter, with an aggregate average spread of two per cent. These
spreads, however, cannot necessarily be extrapolated to the wider
market listings, because of different pricing strategies.
Rental
yields range from 6.6 to 10 per cent, with an average of 7.5 per cent.
Year-on-year, villa and apartment prices are down 37 per cent and 25
per cent, respectively. Since peaking in the fourth quarter of 2008,
villa and apartment prices have declined by 44 per cent and 36 per
cent, respectively.
During the second quarter, average apartment
rents declined 23 per cent to Dh129,900, while average villa rents fell
19 per cent to Dh220,350. Although apartment rents declined more than
villa rents in the second quarter, the opposite trend prevailed in the
last quarter. Year-on-year, rents for villa and apartment rents have
declined by 19 and 12 per cent, respectively. However, since peaking in
the third quarter of 2008, villa rents have fallen 31 per cent, while
apartment rents are down 29 per cent since their peak in the fourth
quarter of 2008.
Relocation driving demand
Relocation
from Abu Dhabi, Sharjah, the Northern Emirates, and within Dubai is the
primary factor driving leasing demand. Abu Dhabi residents who moved to
Dubai but commute to work in the capital are primarily motivated by
location when choosing a new home. High-income commuters tend to prefer
Dubai Marina/ Jumeirah Beach Residences, The Palm Jumeirah, Emirates
Living villas and Green Community villas. Middle income commuters from
Abu Dhabi tend to relocate to Jumeirah Lake Towers and Discovery
Gardens.
Relocation demand from Sharjah is primarily
price-driven and centres on more affordable areas such as Mirdiff,
International City and Al Qusais. Anecdotal evidence suggests that
rents are more rigid in premium locations that attract stronger demand.
In those areas, landlords are less inclined to lower rents.
Overall
demand for villas increased, showing 25 per cent growth in leasing
transactions. Two- and five-bedroom villas experienced the heaviest
rent declines, at 28 and 27 per cent, respectively. Three- and
four-bedroom villas, however, saw rents fall by 18 and 11 per cent,
respectively. Demand for short-term villa rentals remained stable in
the second quarter, compared to the first quarter. However, where
demand for short-term villa rentals was relatively well-distributed in
the last quarter, the second quarter saw Emirates Living become the
epicentre of this segment, accounting for 83 per cent of transactions.
Landmark
expects a total of 22,700 residential units to be delivered by
end-2009. This projection is slightly lower than estimates made last
quarter, as developers continue to re-phase projects and delay
construction. While the current estimate for new unit deliveries in
2010 is 40,400, it expects this to fall to 25,000-30,000 units over the
next 12 months.
For end-users in need of financing, interest
rates and LTV ratios are the key factors shaping residential sales
demand. Mortgage rates are between 7.75 per cent and 10.5 per cent, but
currently average around 8.5 to nine per cent. In contrast,
construction financing rates, which shape supply side decisions, are
currently seven to eight per cent.
"As such, a systematic
imbalance persists, where residential demand is restricted by high
borrowing costs and credit scarcity, while building is incentivised by
lower capital costs on construction loans," said the report.
Price stabilisation
Signs
continue to indicate probable sale price stabilisation in the fourth
quarter, which, ceteris paribus, could be the beginning of a price
floor. However, this is highly dependent on macroeconomic, financial,
and real estate industry policies and trends. Based on historical
trends, sale volumes are likely to dip during August and September, but
then pick up again in the fourth quarter.
The strong demand for
villas is expected to continue from investors and end-users. Based on
current supply projections, villas will constitute less than 20 per
cent of total residential unit deliveries in 2009, and even less in
2010-2011. Given these supply and demand characteristics, villas are
likely to reach a price floor first.
Apartments, on the other
hand, will be subject to additional sale price volatility due to the
large volume of new supply expected over the next two years. However,
price floors are expected to start forming in the short term within
specific areas. Such areas will be defined by stable or limited supply,
plus strong and continuous demand fundamentals.
Due to the
continuing influx of new rental units, average villa and apartment
rents will continue to decline into the fourth quarter. The intensity
and longevity of these declines will depend largely on owner decisions,
such as when to list the property and how much rent to charge. However,
as leasing rates decline, additional demand from relocation is likely
to support rent levels, keeping them from falling too sharply. While it
is difficult to call a bottom, there is some evidence to suggest that
rents in specific areas may stabilise in the fourth quarter. Ultimately
this will depend on the supply-demand dynamics prevailing in each
location.
Office space glut
The
commercial office market in Dubai is entering a period of massive
over-supply amid a pattern of demand destruction, which will probably
last for quite some time. During the second quarter, office sale prices
declined 12 per cent, but since peaking in the third quarter of 2008,
Dubai office sale prices fell 42 per cent. Office rents fell on average
10 to 15 per cent in the second quarter.
The commercial
property glut will continue to worsen over the next three years. During
2009, 10.5 million sq ft (977,000 sq m) of new office space will be
delivered to a market already reeling from economic shocks. While
supply figures for 2010 and 2011 may be revised downward in the future,
actual delivery will exacerbate existing oversupply and push office
prices and rents down.
To absorb the supply delivered only in
2009, Dubai's economy must generate 85,000-90,000 new office jobs.
Based on the office-consuming share of total employment and the rate of
expatriate economic activity, this rate of job creation will require a
20 to 30 per cent population increase. Even under normal circumstances,
this growth rate would be virtually impossible.
Dubai office
prices are likely to decline further, as additional supply enters the
market. Given the prevailing market uncertainty and continuing credit
scarcity, demand is currently minimal and likely to remain low. The
main source of sales demand will come from companies with long-term
commitments to the region.
Abu Dhabi market
While
there are few transactions taking place in Abu Dhabi, the rate of real
price declines appears to be slowing, for the time being. Average
aggregate listing prices regained some stability in the second quarter,
after declining sharply between the third quarter 2008 and the first
quarter of 2009.
The slowing rate of price correction is mainly
a consequence of significant adjustments having already played out
during the fourth quarter of 2008 and the first quarter of 2009, as
well as growing resistance by sellers to lowering their prices.
The
second quarter average price declines affecting Abu Dhabi's main
freehold master developments have been relatively homogenous at
approximately 10-12 per cent. After the price declines seen during the
fourth quarter of 2008 and the first quarter of 2009, the few
transactions actually taking place are now very close to distress price
levels. Price spreads between the lowest listing prices and
transactions are now only five to 10 per cent. In Abu Dhabi, there
appears to be an average price ceiling of Dh1,300 per sq ft for
off-plan properties.
Average rents in Abu Dhabi are starting to
reflect the broad correction now under way in the sales market. After
uncontrolled rent hikes during 2008, rent growth tapered off
(stabilised) in the first quarter. Since then, during the second
quarter, rents have begun falling, especially for off-island villas and
low-quality apartments. This correction will be a relatively slow
process, spanning the next two to three years, as new supply enters the
market.
In the second quarter, average asked apartment rents
fell by about 10 per cent. Low-quality apartment units were especially
affected, while rents for higher-end units were more resilient.
Villa rents
Since
peaking in the third quarter of 2008, asked rents for villas continued
to fall during the second quarter, registering an overall decrease of
23 per cent since the peak. During the second quarter alone, overall
average villa rents decreased by roughly 10 per cent. More
specifically, three- and four-bedroom villas were the hardest hit in
the second quarter, with average rents for these units falling up to 15
per cent across Abu Dhabi.
Relative to current sale and leasing
prices, average market rental yields in the second quarter remained at
seven to 10 per cent, as sale prices and rent levels adjusted roughly
in sync.
Yields are not likely to fall below six to nine per
cent, even if rents and sale prices fall another 25 and 15 per cent,
respectively. Current and projected yields are still well above those
of comparable, mature markets.
In terms of market demand,
Landmark maintains its conservative two per cent annual population
growth forecast for Abu Dhabi, which would translate into a 27,000-unit
undersupply at the end of 2010.
"According to our forecasts,
even if the conservative two per cent population growth scenario
persists for several years, the residential market is still likely to
remain undersupplied for the next three to four years. Assuming a more
optimistic six per cent annual population growth scenario, which is
highly unlikely, the residential undersupply would reach 45,000 units
by the end of 2010," said the report.
After marginal corrections
in the second quarter, average rents are likely to keep falling, due to
supply increases, proliferating vacancy rates, and growing consumer
resistance to Abu Dhabi's high rents.
Commercial prices and
transaction volumes have been impacted by tightened liquidity. There
are currently very few transactions taking place, and investor appetite
for commercial properties is minimal under current economic conditions.
New supply flows, combined with demand destruction from the economic
downturn, have lowered rents for lower quality offices by 10-25 per
cent, depending on location.
Average commercial rents in Abu Dhabi range between Dh177 and 204 per sq ft (Dh1,900-2,200 per sq m).
Currently, Abu Dhabi has approximately 15 million sq ft of office space.
Landmark's
research indicates that 21.9 million sq ft of office space is likely to
be delivered by 2012. To put this in perspective, Dubai had
approximately 30 million sq ft of office space at the end of 2008, and
may have as much as 60 million sq ft by 2012.
The medium- to
long-term strengths of Abu Dhabi's office market are currently
overshadowed by the short-term risk from general economic uncertainty.
Sale
prices are expected to keep falling, as leasehold demand remains
stagnant. Investor defaults are expected to escalate as off-plan owners
decide to abandon future payments, due to declining secondary market
values.
Source: Emirates Business 24/7
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